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Investment: risk and reward

Active and passive investment management

Passive management and active management have very different costs. Fees for active management are considerably higher than for passive management. As a result, active managers will have to outperform the benchmark index by more than their fees to add value.

Active management involves the manager actively buying and selling investments on behalf of the pension fund, with a view to getting a better return than the competition. If the majority of investment decisions are successful, this can significantly boost the value of the pension fund. But if too many decisions are unsuccessful, this can have an adverse impact on the pension fund.

Passive management involves investing as closely as possible in line with a given market index. The objective is to match the index return. Passive investment managers do not take positive or negative views on the market or individual investments. Assets are bought and sold automatically in line with the index.